Recently there have been some legislative changes, aimed at making it easier for companies that are in distress to attempt to trade out of trouble. It is good news for business owners, if the new rules are applied sensibly.
Directors can be found to be personally liable for the debts of a company, where the company is trading while insolvent. The recent changes give some protection to these directors, allowing them to continue trading in an attempt to rectify the company’s problems. In short, a director will not be personally liable for the debts of an insolvent company where:
- The director was taking steps, or developing a course of action, which was reasonably likely to achieve a better outcome for the company than going into administration; and
- The relevant debts were incurred in connection with that course of action.
The relevant course of action must be commenced within a reasonable time and the protection ceases to apply if the company ceases following the course of action. There are also other circumstances where the protection might not be available, for example where the company has failed to maintain proper records.
Another change relates to contractual rights against a company that has entered administration and comes into effect from 1 July 2018. Most commercial contracts contain a provision allowing a party to terminate if the other party experiences an insolvency event (usually defined to include entering administration). The new legislation restricts such rights. As a result, where a company is insolvent, has a managing controller appointed or goes into administration, then any rights which are contingent on that event are void. This will also help companies trade out of difficulty, by protecting their existing commercial agreements.
Care should be taken by the solvent party, who under the new rules cannot simply rely on a clause to terminate, vary or suspend the effect of the contract. If, however, the insolvent party breaches other provisions of the contract, then the other party may be able to rely on those breaches to terminate, subject to the rights under the contract.
If you have any queries regarding the above please contact our commercial law team on 9411 4466.